Corporate America: We’re junk and we like it

Earlier this year, executives at CenturyLink CTL, one of the nation’s largest telecommunications companies, faced a decision. Pay down the company’s debt and bolster its credit rating, or use CenturyLink’s cash to buy back shares, issue more debt and pretty much ensure the company’s rating would be cut to junk. They went with the latter.

“In some industries being investment grade is still important,” says Jim Casey, co-head of debt capital markets at J.P. Morgan Chase JPM, which advised CenturyLink on its recent debt offering. “But in others, more companies are questioning the value of having a top rating.”

It doesn’t seem to have hurt CenturyLink. In mid-March, just a month after the company’s debt was downgraded by credit ratings agencies Moody’s and Fitch, CenturyLink sold $1 billion in new debt. And the rate on that debt, 5.625%, is one historically reserved for higher-rated borrowers.

Executives at MasTec MTZ, one of the U.S.’s largest construction companies, seemed to be unfazed by their company’s low debt rating as well. Rating agencies put its debt at BB-, which is three notches below what is typically considered investment grade. But that hasn’t stopped the company from borrowing. A few years ago the company had to pay interest of 7.625%. Earlier this month, the company sold $400 million in new debt for a rate of 4.875%.

“At the end of the day, getting our company back to investment grade is not really a goal,” says MasTec CEO Jose Mas. “There was a time when it was difficult to borrow. Now the market is on a tear.”

Sales of high-yield debt hit a record in 2012, and the pace has kept up this year. The wide-open market for debt appears not only to be wiping away memories of the credit crunch, but also shifting corporate attitudes toward debt. Bankers say more and more companies prefer flexibility over an A rating. A higher credit rating would prevent them from borrowing money for expansions or acquisitions.

“When I talk to companies about their aspirations, being investment grade is not at the top of the list for most,” says John Cokinos, who is the head of leveraged finance capital markets at Bank of America Merrill Lynch BAC. “More important is the cost of capital and flexibility.”

Indeed, it’s been years since the bulk of corporate America got top debt grades. Over the past few decades, companies have piled on debt. Now even staples of corporate America appear to be OK with lower ratings. Earlier this year, executives at ketchup maker Heinz HNZagreed to a buyout that will likely end with the company’s debt being downgraded to junk.

Accelerating the shift appears to be the Federal Reserve, a by-product of the U.S. central bank’s effort to boost the economy. To do so, it’s kept interest rates low. That’s made it cheaper for all companies to borrow, which is Bernanke’s goal.

Source: FINRA, Bloomberg, Bondtools.com

The cost of borrowing has fallen more sharply for the riskiest companies. The spread between what it costs the average investment grade company to borrow and what a company with a junk rating has to pay has shrunk to 2.5 percentage points. That’s down from an average of nearly 4.5 percentage points last July. As a result, it seems, CFOs are putting less of an emphasis on a having a higher rating than ever before.

“I don’t mind it right now,” says Roger Manny, the CFO of energy company Range Resources RRC, of his company’s BB rating, which puts it at the top edge of the junk pile. “It’s a good time to be non-investment grade.”

Talk like that is sure to fuel more concern about a debt bubble. Fed governor Jeremy Stein, in a speech last month, warned about a the rise in junk bonds. Last week, the Fed said it plans to more closely watch the leveraged loan market, to determine if banks were making riskier loans than they should be.

Jeffrey Meli, who is the head of credit strategy for Barclays Capital, says he’s not worried yet. But he thinks corporations’ lax attitudes toward debt could eventually become a problem. “We’re at just the beginning of the trend,” he says.

Barry Ridings, one of Wall Street’s top restructuring experts and the guy CFOs call when they want to improve their credit rating, says the shift isn’t as big as some bankers say it is. He says some of this positive talk about junk is just bankers trying to boost their business.

Still, he says he is getting fewer calls these days from lower-rated companies. “They are saying if the market is going to accept my high-yield debt, then why do I need to pursue a restructuring at this point.”